Guest Post: Paul Krugman's Fallacies

Krugman, Summers and the First Keynesian

Paul Krugman has used the occasion of Larry Summers' speech at the IMF to lay out his economic views, or let us rather say, his economic fallacies. As we already mentioned, the fact that Krugman liked Summers' speech proves ipso facto that it was a bunch of arrant nonsense. Krugman has subsequently proved us right beyond a shadow of doubt. A great many long refuted Keynesian shibboleths keep being resurrected in Krugman's fantasy-land, where economic laws are magically suspended, virtue becomes vice and bubbles and the expropriation of savers the best ways to grow the economy. It is important to keep in mind in this context that most of what Keynes wrote in the General Theory wasn't original – it was mainly a rehashing of the underconsumption and inflationist fallacies propagated by his less famous predecessors. As Henry Hazlitt remarked in his detailed refutation of Keynes (“The Failure of the New Economics”):

“I have analyzed Keynes's General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence, to what to some readers may appear a tedious length, and I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.”

If one looks back at the history of economic thought, the earliest proponent of what we know as Keynesian errors today was probably John Law, the infamous Scotsman who almost single-handedly managed to ruin the economy of France (in fact, all of Europe was thrown into a depression lasting decades as a result of Law's monetary experiment). He was convinced that what the economy lacked was 'spending' and so endeavored to provide it with the necessary means – in spades. The result was a giant asset bubble and crack-up boom that left the economy in utter ruins when it ended.

Although Law's scheme involved speculation in the shares of what turned out to be a company that was worth much less than advertised, at the heart of the operation was a monetary scheme based on his previously developed theories. The plan involved the printing of oodles of unbacked paper money which Law thought would spur a revival of France's moribund economy and concurrently fix the government's tattered finances. As is almost always the case with inflationary schemes, it appeared to work initially. In fact, it seemed to work almost too well (if Tonto had been around, he would have noticed that something was wrong). The world's first 'millionaires' were created, for a brief time at least (most of them ended up as paupers, similar to Law himself).

The problem with all such schemes is essentially that scarce resources end up being invested unwisely, as inflation makes it appear as though they were more plentiful than they really are. Once the inevitable collapse comes, these unwise investments are unmasked and it become obvious to all that capital has been squandered.

John Law – the world's first Keynesian

(Image via Wikimedia Commons)

One of the ultimately worthless paper promises issued by Law's Banque Générale

(Image via Wikimedia Commons)

The 'Logic' of Nonsense

What we noted above regarding 'wise' and 'unwise' investment is an important point to keep in mind when considering Krugman's rehashing of Keynesian fallacies. Krugman writes:

“Larry’s formulation of our current economic situation is the same as my own. Although he doesn’t use the words “liquidity trap”, he works from the understanding that we are an economy in which monetary policy is de facto constrained by the zero lower bound (even if you think central banks could be doing more), and that this corresponds to a situation in which the “natural” rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative.

And as he also notes, in this situation the normal rules of economic policy don’t apply. As I like to put it, virtue becomes vice and prudence becomes folly. Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift. Fixating on debt and deficits deepens the depression. And so on down the line.”

(emphasis added)

We already discussed that the idea that the natural interest rate can become negative is a fallacy (see “Meet Larry Summers, Social Engineer” for more color on this). To briefly summarize, for the natural rate to go negative, time preferences would have to go negative too, as interest rates are merely the ratio between present and future goods. However, a situation in which human beings value attaining the same satisfaction in a more remote future more highly than attaining it in a nearer future is simply unthinkable (capitalistic saving, i.e., abstaining from present consumption, always aims at obtaining more goods and/or services in the future).

All this 'liquidity trap' and 'paradox of thrift' stuff makes no sense whatsoever. Savings are not 'lost' to the economy, they are the sine qua non without which capital accumulation and production are not possible. Virtue doesn't become vice in an economic downturn and economic laws don't change. As William Anderson points out in a recent article, the problem with this thinking is that it ignores capital theory. Attempts to revive the economy with deficit spending and inflation will never stimulate all factors of production simultaneously and to the same extent. The moment one considers the heterogeneity of capital it becomes clear that such interventions must lead to distortions which result in the boom-bust cycle (the housing bubble that expired in 2007/8 provides us with an excellent recent example for this).

“This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involvesfaking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing.”

It is simply incorrect that 'unproductive spending is better than nothing'. Recall what we said above about 'wise and unwise investment'. Deploying scarce resources in unproductive fashion is not 'better than nothing', it will simply consume capital and destroy wealth. Krugman continues along these lines, seemingly eager to enlist everyone in his plan to waste as much capital as possible:

“Larry also indirectly states an important corollary: this isn’t just true of public spending. Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future.That last bit is an important qualification. But suppose that U.S. corporations, which are currently sitting on a huge hoard of cash, were somehow to become convinced that it would be a great idea to fit out all their employees as cyborgs, with Google Glass and smart wristwatches everywhere. And suppose that three years later they realized that there wasn’t really much payoff to all that spending. Nonetheless, the resulting investment boom would have given us several years of much higher employment, with no real waste, since the resources employed would otherwise have been idle.

OK, this is still mostly standard, although a lot of people hate, just hate, this kind of logic – they want economics to be a morality play, and they don’t care how many people have to suffer in the process.”

(emphasis added)

So 'wasteful spending is a good thing unless it stores up trouble for the future' – Krugman says that this is an 'important qualification', only to proceed to show us in the next breath that he actually does not feel constrained by any such 'qualification' at all. Presumably he put that filler sentence in there so that when people in the future take a look at what he recommended in the past, he can claim to have 'qualified' his demand for wasteful spending (recall his vocal demand for a housing bubble before housing bubbles turned out to be uncool, which continues to cause him well-deserved embarrassment). When the latest scheme to 'rescue' the economy by inflation and deficit spending fails, he will be able to dig up this 'important qualification' (as if there could be any wasteful spending that doesn't store up trouble for the future).

The idea that 'idle resources' need to be pressed into service is also due to Krugman having no inkling of capital theory. In the Keynesian view of the world, capital is a self-replicating homogeneous blob, some portions of which are currently accidentally 'idled' and only need to be prodded back into action with the help of government spending. This is not so. Capital is not only heterogeneous, much of it is highly specific and inconvertible. What appears to be unnecessarily 'idle' are simply the remnants of previous malinvestments. It may no longer make economic sense to employ the capital concerned. Workers who used to be employed in lines of production the products of which are no longer in demand may be holding out, hoping for the sector to 'come back' rather than accepting a lower wage in a different occupation.

As an example, consider the housing sector that was at the center of the previous boom. If building companies have invested in enough machinery to erect two million houses per year, but I has turned out that there is only demand for 400,000 houses, it wouldn't make sense to employ the superfluous machinery and construct two million houses per year anyway. People that were employed in construction may need to retrain or move and be willing to accept less remunerative work. It is certain that e.g. far fewer roofers are needed today than during the building boom. Renewed credit expansion is likely to affect different sectors of the economy, but if it leads to another artificial boom in the same sector, it will merely prolong the life of malinvested capital and delay the necessary adjustments. Krugman argues along Keynesian lines that 'stuff the government has dropped into coal mines should be dug up', but neglects that this activity doesn't come without costs (or rather, erroneously argues that the costs don't matter).

Krugman avers that this 'logic' is hated because people are informed by a warped sense of morality. The problem has nothing to do with morals though, the problem is that there is simply no 'logic' discernible. Krugman offers the most illogical ideas and then proceeds to call them 'logic' as if that could somehow dignify them and mitigate the fact that they are offending common sense.

More Bubbles Please

Believe it or not, it gets still more absurd. Not only does Krugman conclude that it is supposedly advisable to engage in unproductive spending because it is 'better than nothing', he also believes that Summers' speech contains an unspoken demand for more bubbles. And why not? After all, he has already concluded that 'prudence is folly', so why not throw prudence overboard, lock, stock and barrel? Never mind that this is what policy makers are already doing, so there hardly seems a great need to egg them on. According to Krugman:

“We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.

So you might be tempted to say that monetary policy has consistently been too loose. After all, haven’t low interest rates been encouraging repeated bubbles? But as Larry emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’ answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.”

(emphasis added)

The seemingly insoluble questions Krugman grapples with are not as difficult as he makes them out to be. The problem is that what he calls 'inflation' is only one of its many possible effects.Where the effects of inflation on prices first appear is a matter of the specific historical circumstances. Given strongly rising economic productivity, a huge expansion in international trade (and let us not forget, the transformation of the former communist command economies into market economies), it should be no great surprise that the effects of the huge credit expansion and money supply inflation of recent decades showed up in asset prices rather than consumer prices (incidentally, a very similar thing happened during the boom of he 1920s, during which economists also ignored a major credit and money supply expansion because consumer prices were tame due to strong increases in productivity).

This does not mean that other negative effects of these inflationary credit bubbles didn't put in an appearance. They all caused a distortion of relative prices and were thus all marked by massive capital malinvestment. Successive credit expansions led temporarily to higher employment even as capital was misallocted, but a steadily worsening underlying structural situation has become evident as these booms have inevitably turned into busts. So what solution does Krugman have to offer? He evidently thinks coercion and theft are the best way forward:

“Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits.Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.”

(emphasis added)

Or putting it differently: do what John Law did and destroy what's left of the economy. The elimination of paper money (i.e., cash), would force people (whether they like it or not) to keep their money in what are essentially insolvent fractionally reserved banks that have proved beyond a shadow of doubt that they cannot be trusted. This poses no problem for Krugman, because it would make it easier to steal people's savings via the imposition of 'negative interest rates' (i.e., a regular penalty to be deducted from their hard earned money).

Krugman then expresses his advance surprise at why anyone would be outraged by this combination of abject economic nonsense and outright theft. After all, it would amount to nothing but the good old 'euthanasia of the rentier' once recommended by Keynes:

Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

(emphasis added)

What Krugman proposes here is indeed tyranny. The 'liquidity trap' is a figment of the Keynesian imagination anyway – no such thing exists. A positive rate of return on savings doesn't need to be 'promised' by anyone, it would be the natural state of affairs in a free market economy. Krugman then jumps to yet another conclusion, namely that in light of the above, the size and growth rate of the public debt would of course no longer matter at all:

“Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying:servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.

Summary and Conclusion:

According to Paul Krugman, saving is evil and savers should therefore be forcibly deprived of positive interest returns. This echoes the 'euthanasia of the rentier' demanded by Keynes, who is the most prominent source of the erroneous underconsumption theory Krugman is propagating. Similar to John Law and scores of inflationists since then, he believes that economic growth is driven by 'spending' and consumption. This is putting the cart before the horse. We don't deny that inflation and deficit spending can create a temporary illusory sense of prosperity by diverting scarce resources from wealth-generating toward wealth-consuming activities. It should however be obvious that this can only lead to severe long term economic problems.

In fact, the last credit boom, in which policy makers fully implemented what Krugman and other Keynesians proposed, has done enormous structural damage. Not even the biggest spending spree and money supply expansion of the entire post WW2 era has been able to divert enough wealth into bubble activities to create a full-blown pseudo-'recovery' so far. Krugman's conclusion seems to be that more of the same is needed. In other words, we are supposed to repeat what clearly hasn't worked before, only on a much greater scale.

Finally it should be pointed out that the idea that economic laws are somehow 'different' in periods of economic contraction is a cop-out mainly designed to prevent people from asking an obvious question: if deficit spending and inflation are so great, why not always pursue them?

Go back to licking Krugman's balls in his comment section of his NYT blog, where any person who dares to not only disagree with the High Priest of Economic Autism, but refuses to slobber on his knob, is barred from further debate...

Holy hell...articles like this one actually make Krugman look smart which is part of the problem. If your gov't friends or college teacher friends or appl/fb/twtr friends aren't buying you dinner or a beer or gold coins or a lap dance at the strip clup, you should ditch those "friends". The US is getting negative real rates for a very long time as the people that hold the dollars right now lack any kind of real intellectual capacity. Krugman knows the words...but not the meaning. He can't...as he's never been in the private sector. Smart guys like him are so scary because they command so much mindshare in the world with no check or balance on the flaws in their thinking. Anyway...enjoy the next decade of decline and hardship as people with plenty of dollars try to fight about how to run an economy with jawboning and nonsense.

Krugman is one of many opportunists who make a living telling the world that bad is good. Similar Authors write books entitled: "Obesity is Good For You," "The Sugar and Fat Diet for Great Health," "Borrow Your Way to Riches,", "The No Work Way to Wealth," "Drinking Your Way to the Top," "Abusing Your Employees will Make them Love You," etc. These Authors will be very popular with crooks, fatties, the vain and pompous, and of course to the government. It's Krugman's business model.

"Krugman is one of many opportunists who make a living telling the world that bad is good."

The garbage that is Keynesianism, specifically the neo-classical variety, persist because it tells both banks and governments what they want to hear - you can borrow your way to prosperity. Simple as that. Until the incestuous relationship between banks and governments ends, which will be never, that garbage will be the officially accepted dogma.

And by all means remember who provides the platform for this fool to propagandize the public; The New York Times. An agent of the Devil. or of the Federal Government; which is the same thing. Remember this well; they put the mark on their own forehead by giving this maniac space in the public eye for his drooling madness.

> If you apply Krugmans beliefs to any individuals personal financial life

That's why Keynes created TWO economic paradigms: Micro economics (ie "any individuals personal financial life") and Macro economics (national economics). That way he can say that just because it would fail if an individual was to do it, it succeeds when nations do it. What a slime-ball he was.

The distinction is not arbitrary. The basic assumptions of micro - e.g. that sellers and consumers are price takers - don't apply at the government (macro) level, where the gov can and does dictate market size, prices, etc. Of course things will be different. Government also has policy tools (guns) that allow them to conscript labour, confiscate assets, and tax income - options not available to your local grocer (thank God, 'cause he doesn't like me.)

Man's history has been marked by many discoveries that are contrary to intuition and common sense. Keynesian stimulus was such a discovery. Even after reflationary economics had been proven to be successful by the New Deal and wartime spending, there are still idiots who equate a national economy with a household's finances and refuse to acknowledge multiplier effects. What is the alternative to stimulus? A grinding depression that inflicts misery on everyone but the rich for decades? Austerity has been a disaster in Europe, which is actually doing worse than the 1930s. If the US had followed the European path, as recommended by the austerity troglodytes on ZH, we would have worse unemployment and negative growth.

You ain't from around here, are ya'? You actually think that endless debt is the A-Train to prosperity? C'mon down to street level, Kant. There's people here who can show you the way forward. There's also people here who'll slit your gut for ten dollars. Scary for ya', ain't it?

As Empires have risen and fallen throughout history with the same consistency as the sun rising in the east. One would think that TPTB would be intelligent enough to learn from history, but alas, it appears that we are not yet removed from swinging in the trees long enough to learn from prior mistakes.

I disagree. TPTB merely work where in time they happen to fall on the rise and fall timeline.

We are approaching a fall so the TPTB simply profit fromthe doom and prepare for the next big thing. Theres money to be made all along that timeline and power to be grabbed and maintained. I could argue that more power and money are made duringthe fall than during the rise.

How about a real economy with genuine business going forward, employing people to produce goods and services people need? How about an honest money system and honest efficient law enforcement that allows an honest person to make a profit and keep most of it, and puts a stop to fraud, graft and theft?

Except the majority of the New Deal never made it into law as the Supremes kicked it in the teeth and invalidated the whole thing, along with FDR's infamous 100% taxation ideas...

The damage that was done by the government work programs prolonged the recession from the initial bail-outs into a depression that lasted until after World War 2.

The 'stimulus/mass intervention' caused the depression in the 1930's. When the government finally started pulling out of controlling everything the economy recovered. Europe is a fucking mess, and the poverty is increasingly grinding there.

first of all keynesian theory assumed there was a restraint on the printing press(gold) so he did not advocate, at all, what is happening today. in fact, he predicated his ideas about stimulus spending upon a fiscally responsible .gov. show me one(there are actually a few...for the time being). so what is called keynesian today is not.

secondly, in a real economy, where a reduction in .gov spending means, at least, an equal increase in private spending is what austerity was sold as. iceland came closest to getting it right. if the rest of world was not so intent on plundering the nation you might have seen a real case study of a true austerity plan. iceland, as you know, was the first to recover from this mess. instead, austerity in europe with the exception of a few east european countries was austerity for the people and more debt for .gov, the exact opposite of an austerity plan that may have worked.

unfortunately the world economy is so misallocated that a severe depression may be the ultimate cure for all the malinvestment and probably will be on a "whether you like it or not" basis.

the current regime that quackman advocates is the ideal system for .1%ers. real assets flow into their pockets and there is no inflation except in the assets they own. they are slso better equiped to get out safely when the bubble bursts to go into the next bubble asset. fucking brilliant, if you ask me. you gotta play the game you are given. the mob loves it.

what i get a kick out of in all this "we have to have inflation talk" is the easiest way to achieve inflation is monthly check from .gov for however long it takes to flood the real economy with cash to be spent where the receipient of the cash sees fit possibly with a reward system for spending all of it on crap instead of assets. that sounds like something quackman would come up with. why doesn't he?

How did war spending 'get us out of the depression'? It only made life harder. Guys slopping around in shit up to their knees getting shot at and women back at home slaving away making more bombs. Yeah, sounds like prosperity to me.

What actually got us out of depression was when that horseshit finally ended.

As for Europe, they haven't tried AN OUNCE of REAL AUSTERITY on GOVT SPENDING. ITS ACTUALLY INCREASED!!!!

Meanwhile, the private sector is being carved out to support that rot and abuse like a Saw victim in a basement.

No, there would always be a higher preseant than future value. If you enjoy something at the same level today as tomorrow, why not have it today and also gain the extra day to savor whatever pleasure the item may have imparted?

I do understand, Kant. But, posit for a moment a system that fails to do the right thing even when the economy is booming. Not just sometimes, but every time. In fact, those who operate the system argue that when things are going so well, they might as well let out even more slack, so as not to allow things to slow and all.

How long would this have to continue before you'd accept that it might be better time to take the tough actions anytime they become feasible, even if it might be harmful in the short term, just to make sure it actually happens?

See the primary issue you are having is that there is no such thing as a "Nation's Economy". There is merely millions of family financial situations/economies that are being stolen from by the government class of parasites. The government does not have it's own economy, because it doesn't produce anything other than rent seeking behavior incentives. Everything they "buy" they do so with stolen wealth.

Well the banker class is doing a good job of doing that as well, but they are using the government to do that for them, so yeah...

Your logic is just pure garbage. Your theories are total nutjobs because they are economic theories WITHOUT any proper foundation of CAPITAL THEORY. Your "I told you so"s are purely based on cherrypicking data and disregarding data that do not agree with your idiotic theories -- theories that have already been disproved in 1970s US mini-hyperinflation.

You should just go away with your imagined aliens & travel to some imaginary universe. Perhaps you will manage to destroy their economy, too. This way, you will provide humanity a service - by preventing alien invasions.

Please go back in time and tell this to every administration since Kennedy that has kicked the can down the road on fiscal responsibility. Political objectives and fiscal responsibility are diametrically apposed, as we have seen for the last 50 years. Now the patient is on life support and the only thing keeping it alive is QE. So your solution is to keep throwing fuel on the fire? Sorry, but anecdotal evidence over the history of the world refutes your claims.

A FAMILY'S FINANCES DON'T WORK THE SAME WAY AS THOSE OF A NATIONAL ECONOMY.

True, but the diffierence is the state gets to counterfeit money, and steal money at gunpoint. Neither one is good for the individual in that state, unless that individual is part of the government or a crony thereof.

A families finances don't work like those of a nation over the short term. However they are both constrained by reality over the long term. Eventually the Nation runs up against the reality of limited resources and limited national wealth. A family cannot steal from it's neighbors bank account but a nation can steal from it's citizens bank accounts, until of course it cannot.

If you don't know what Keynesian/neoKeynesian economists think and recommend then you should not be writing blather and bunk...and if you, the reader, think that you can't find out about Keynesian economics as it really is proposed (rather than the lies and distortions on this blog)...PLEASE!...Just google the topic!

Even wikipedia does a decent job of outlining Keynesian economic theory. It is not rocket science.

Keynes layed out a common sense and pragmantic dynamic that prompts government interaction with the market in order to staqbilize the boom and bust cycles and mitigate the inevitable Crisis of Capitalism we see through out history. Too bad the jackass who wrote this diatribe has NO CLUE as to what Keynesian economics represents.

And to say Larry Summers is a Keynesian is just WRONG WRONG WRONG. Geez, next you will say that Alan Greenspan was a Keynesian!! INSANE BS!

Thus speaks another Kool Aid consumer. At least he's correct that Keynesian economic theory is not rocket science. In fact it's nowhere close to any kind of science. It's economy destroying voodoo, and history will inevitably repeat itself once more.

Keynes advocated that one man (or a small group of men) can make better decisions than the collective action of millions of selfinterested citizens.

That's hubris. Why should any indiividual cede to some small cabal the power to manage their money or manage the economy as a whole or part. Who the fuck gave Keynes or the Fed the power to manage these things? certainly not the citizens of the United States.

The experiment in negative value debt based currency is a failure. They have created a debt tower that must perpetually grow or risk toppling the entire system. Free market price discovery in the bond market would bring the tower down, so that must be avoided by artificial Fed stimulus. Just when you thought it couldn't get any more insane, the Fed acolytes are now urging Yellen to go negative on interest rates. The sense of urgency and reckless abandon suggests time is running short on the debt tower of babble. It won't take much of a tremor to bring it down hard.

1. You begin your post with an ad hominem argument. Have you no shame?

2. Paul Krugman and those with similar views are most definitely not in control of our economic or monetary policy. They have been outsiders for SEVERAL DECADES. The mess we are currently in can in no way be attributed to following policies derived from neo-Keynesian economics. Paul Krugman has been abundantly clear about what those policies would be, and we have not been following them! And, let me reiterate: The financial collapse of 2008 and the subsequent economic doldrums that continue to this date really are a mess.

3. On the other hand, the "freshwater economics" which dominates the U. of Chicago and the Federal Reserve banks can very definitely be blamed for the mess. It is their economists who have dictated and informed both economic and monetary policy over a long time period. And, they continue to make concrete predictions about the economy, based on their theories, which do not pan out. They have predicted massive inflation -- where is it? They have predicted skyrocketing US Treasury bond rates -- where are they?

So, if you really want to play the ad hominem argument game, then there are some economists who really should be trashed, based on their recent performance and actual policy failures. And, all of these are calling for austerity and for higher interest rates.

You are 100% correct. I’m glad to see someone state the truth. The Chicago School is largely responsible for this mess. Also, Krugman has been far more correct (in situation assessment & forecasting) than any of the Austerian/Austrian types featured on ZeroHedge. Ad hominem arguments seem to the preferred method of argumentation of the ill-informed.

An obvious point; stated in the article- It is simply incorrect that 'unproductive spending is better than nothing.’ This statement comes from the same folks who claim that FDR’s government intervention and spending prolonged the Depression and it was only WWII that finally turned the tide. If it weren’t for WWII, we’d still be in a Depression!

Of course, they never seem to continue the argument slightly further in history. If they do so, they must confront the fact that WWII involved the creation of massive government deficits on completely unproductive spending along with unprecedented government intervention in the economy.

None of this is good, but it did work to break out of the liquidity trap (clearly a REAL phenomenon) formed in the 30’s. Also, don’t forget the short burst of inflation that occurred just at the end of the war and then quickly receded. All of this lead to phenomenal growth starting in the late 40’s and continuing for decades.

Summers (I am not a fan) is only just now coming around to a Krugmanesque view of the world. Krugman’s ideas (particularly on the fiscal side) have largely NOT been implemented.

Austrians do not say that WWII ended the Depression. What ended the Depression was the 2/3's cut in government spending and the return of all the productive labor of the troops coming home at the end of the war. The biggest year for growth, the year the Depression really ended, was 1946. The expansion of GDP during the war was simply money stolen from the people being handed out to war profiteers in the MIC. The average American's standard of living did not begin to increase until '46.

WWII involved the creation of massive government deficits on completely unproductive spending

Er, you may think the elimination of violently racist fascism was 'unproductive' but there are millions who might disagree with you.

Apparently, you and others think that the successful end of WWII by the Allies was a foregone conclusion. Any serious student of the war realizes otherwise. The Nazis were probably only 1-2 years from perfecting their V-2 rockets, and maybe only 2-3 years from building an A-bomb. A couple of A-bombs on London, maybe one on NY delivered by submarine - you think the Allies wouldn't have sued for peace? Think what you will of German scientists; they are NOT stupid. If the US hadn't entered the war in 1941, and Hitler hadn't attacked the Russians for another year or two, we might all be under some form of Axis rule.* Just to recap, after he'd finished with the Jews, Hitler would doubtless have moved on the blacks, who he considered 'mongrels'. He might not have killed them, but I suspect his plans for them would make antebellum slavery look like a picnic. As for the xenophobic Nips, they would have had all Asia toiling like coolies, except for the cute women, who would have been co-opted into Asian Joy Divisions. I for one am very happy that particular future was stillborn.

As I stated in another post, the issue is -and I'm going to put this in big letters, so you might understand - WE NOW LIVE IN A WORLD WITHOUT FRONTIERS. By frontiers, I mean new, relatively uninhabited spaces where surplus people can go, find a new start, and grow. (Not, as some other idiot insisted, 'nanotechnology'; it's a powerful technology, but I wouldn't want to LIVE there.) Those places are all gone, and the outlet for past 'surplus' production is temporarily quelled. (I don't doubt that we'll go into space in a big way eventually, but it will be more than five or ten years.) A society that has always concentrated a fair amount of resources on pure growth - home and office construction, durable goods, etc. - will of course stagnate when there's no need for new homes, or offices, or railway cars (at least, not at the rate we needed them in the past).

So, we need, in decreasing order of importance, a new frontier, a new economic paradigm, and fewer people. The new frontier - which has to be space, unless someone invents time travel - is some years distant; we're not going to live under the sea, under ground, or in low earth orbit in any significant numbers. Fewer people is happening, slowly - as each country gets more educated (and more important, their women get liberated) birth rates fall to replacement (or under) levels. Islam and sub-Saharan stupidity are the biggest culprits here. But to readers of this blog, the new economic paradigm is what counts.

'Stuff' is becoming less important; in the West, even charter members of the FSA have food, shelter, clothing, and entertainment that kings couldn't have dreamed of 300 years ago. Every year, things become easier and cheaper to make, thanks to increased robotics, computerization, 3D printers, etc. Deflation in 'stuff' is the normal state of affairs. The one area where personal productivity has been hard to increase (after the one time effect of PC's) is services. It's no quicker to get a hair cut, chest X-Ray, or accounting statements done today than it was ten years ago. So, the cost of services has risen, relative to the cost of stuff. Herein lies one part of the answer.

If people making stuff - which for centuries, in either agriculture, industry, or the arts - was the dominant work of the past, services will dominate in the future. Those with difficult to attain and highly prized skills (doctors, lawyers, ace programmers, JJ Abrams) will command very high salaries. The rest of us, not so much. But you don't have to be at the top of the pyramid to be of value. I'm pretty knowledgeable about a bunch of things. I could probably tutor neighbourhood kids in high school math/physics/computer science. I'm not a bad cook; I could probably cater parties in my area. I'm a good, but not pro, golfer; I could probably give lessons. In a perfect world, I would be able to leverage any or all of these skills into some kind of income stream greater than telemarketing or Burger King.

But probably falls up against two big hurdles: accreditation, and regulation. Even though I studied EE and have an Honours MBA, I haven't taken any education courses. So I can't get approved as a tutor because I don't have accreditation. I can't get approved as a caterer because my home, though very clean, wouldn't pass commercial standards (we have dogs, for example). Thus, low-level service activity stagnates because of very high barriers to entry. And that's just for me.

What if, as a caterer, I wanted to hire 2 or 3 people to help? Now I need employer and employee numbers, withholding taxes and accounts, Workers' Safety Board insurance, etc. I probably have to fit under half a dozen EPA/OSHA rules. I probably need to incorporate to protect my home because the first time some customer has an upset stomach within a week of eating my food, some shyster lawyer will be suing me for food poisoning, and so on, and so on. The extra effort completely unconnected to the actual preparation and delivery of food, but directly connected to statist government and busybodies, wipes out the incentive to start the business.

The "Chicago School" is NOT 'largely responsible for this mess'. You can't follow one part of a multi-part prescription, and then say "It doesn't work" with the Chicago School, any more than you can follow one tenet of Keynes (run deficits in bad times) without following another (run surplus in good times), and then blaming the mess on 'Keynsianism'. Neither school of thought has been applied systematically and/or rigourously, and therefore, no one can say with certitude 'this works and this doesn't'.

Finally (and I apolgize for the length here), Krugman seems to ignore, or more likely, doesn't understand the plummeting velocity of money. You can create money all you want, but if people and companies are scared to invest because they have no idea what the next year is going to look like, let alone five or ten, (will Obamacare be implemented or not? will ZIRP persist or not? will subsidies for "x" continue? etc.), then THEY ARE NOT GOING TO INVEST. This very real 'liquidity trap' has nothing to do with economics per se, and EVERYTHING TO DO with statist government intervention.

In a private market, people will invest if they see fit, and take their lumps if they're wrong. Segways, for example. But in a government controlled market, who knows what's going to happen next? It's not like you can trust what Bambam is saying ("if you like your plan.."), or what the Fed says, or what the Supremes ("it's a tax that's not a tax!") say. It's capricious and arbitrary, and in the minds of many here, rigged, so that GS can get all their bad trades cancelled but you and I pay up.

No one in their right mind would invest in these circumstances, so I expect that Krugman is 100% leveraged on margin.

* I'm not even including the increased prodction of jet fighters which the Allies didn't have - just those alone, developed with another year's breathing room before the US entry, would have turned the air war, and eventually the entire war, in Germany's favour. Without daily carpet bombings of important factories, Germany produces all the Tijger tanks she needs to mop up in Eastern and Western Europe, and with that base secure, Englsnd doesn't stand a chance.

Where did the freshwater economic schools argue for higher taxes? Where did they argue for massive government intervention into the health care system (16% of the economy)? Where did they argue for a complete lack of debt writedowns and resolutions to insolvent banks? Where did they argue for excessively low interest rates to fuel a housing boom to compensate for the hangover of excessivley low interest rates that caused the tech boom?

Multipliers are complete nonsense as the growth being "multiplied" is always reduced elsewhere (people moving to a new area no longer contribute to the economy of where they were). This is never considered in the multipliers. Increasing productivity and overall population growth are the only ways an economy grows.

When we had real austerity the economy always recovered quickly. See recovery of US busts prior to 1929.

Economics is simple. It is only government and academic types that want to make it seem complicated.

This is a great article Pater. Enjoyable read and thanks for the hard work. Here's what's funny about the Keynesians. For all the advocacy about monetary expansion and how consumption fuels the economy, none of them ever step forward and advocate that every single account holder be given a blanket $1,000,000.00 to do with as they see fit. Of course there would be all the same inflationary effects and the subsequent debasing of the currency. But think of what 300 million Americans would each do with their own 1 million bucks. But no. This sort of consumption and "radical" expansion of the monetary base is not what they Keynesians have in mind.

They assume they're a ruling class. They assume the powers of the ruling class. They only perceive the needs for the ruling class and see the world through the prism of the ruling class.

When the ruling class's neck is finally put to the fine edge of hard steel they should enjoy the same privilege.

There was a south park episode about aliens who dropped of a lot of money on earth. I dont remember what they mad fun of in that episode. Do you remember the episode they implied that people who want to abolish the FED have small penises? It was like they were doing pr for the FED.

I read in a book called the future of money about local currencys that have a timestamp and you have to use them before they become worthless.

Hi, these comments about fucking Krugman and fucking Keynes is just bullshit. You say NY Times sucks, but this post is close to Neanderthal gibberish. Fair enough, you disagree with Paul K. and Keynes, but the article is void of serious arguments.

Statements like this is pure nonsens: "All this 'liquidity trap' and 'paradox of thrift' stuff makes no sense whatsoever. Savings are not 'lost' to the economy, they are the sine qua non without which capital accumulation and production are not possible."

You don't need to be Krugman to agree that somehow the economy can get stuck in deep shit in the midst of recession, and that private (excessive) savings then is not only wasted, but outright destructive.

Fair enour, there are way too much debt everywhere; we can agree about that, but don't throw any reasonable macroeconomic argument overboard with the bathwater.

A simple scoring of Krugman's predictions against the Chicago school shows consistent wins for his analysis. The Chicago boys predicted serious inflation, while Krugman said no. Krugman was correct. The Chicago boys said that the unemployment was structural (wrong skills in wrong places). Krugman showed that there was high unemployment all across job categories. But the Chicago school still controls the conventional wisdom that we need to cut the deficit, no matter what is happening in a depressed economy.

To all the Keynes deniers: please explain why massive deficit spending during WWII for useless junk for the Free Stuff Army did not end the Great Depression. Please explain why this record level of debt did not destroy the American economy.

The WWII period had greater shortages of basic goods than the Depression and forced savings. Government spending crowded out the rest of the economy. The debt did not destroy the economy because a) it had a clear end and b) austerity followed over the next 20 years (balanced budgets through Johnson) as the debt was paid off. Also the lack of goods availability forced savings that represented pent up demand after the war. WWII was an expensive one-time project, not a structural deficit between benefit outflows and inflows that faces us today.

Economist trolls point to the nominal GDP increase and say WWII cured the Depression; in reaity the WWII experience was stagflation and austerity for non-war profiteers.

There is another element to this: people were (generally) willing to accept austerity as a necessary sacrifice for the war effort. There was a tangible beginning, and - in their minds at least - a tangible end; something to move foward towards.

They were engaged, incentivized, and galvanized. Their hunger meant that a soldier on the front lines had enough to eat. Evey calorie that soldier ate was step more he could take. Every step he took towards Berlin was one step closer to victory.

War doesn't create anything. It destroys. But what it does do is it allows the state to achieve its ultimate goal: rallying the populace towards a single goal; giving the state complete and utter control over the economy, and its requisite parts - not the least of which is labor.

But what idiot Keynesians took away from that is that war boosts demand, thus war is good for the economy. It might work in the short-run, as people tend to rally around the flag as the first bombs drop, but it doesn't last long. Furthermore, without a draft there is no sense of sacrifice, and thus there is no skin in the game from the populace at-large.

No one today is going to give up their Starbucks so that a drone can circle a village in a country whose government we are allied with (allegedly).